This article looks at how I measure dividend growth along with other factors that support sustainable dividend growth.
The first thing I look for in a company is a track record of consistently covered dividends. That’s a reasonable starting point, but like most incomefocused investors, I don’t just want dividends, I want dividend growth as well.
At the very least, some amount of dividend growth is necessary if only to keep up with inflation. In other words, if a company fails to grow its dividend faster than inflation over the mediumterm, then the purchasing power of those dividends is actually falling.
Measuring dividend growth
If we’re looking for dividend growth, then it seems sensible to start by measuring the growth of a company’s dividend. And while I do measure dividend growth, that isn’t where I start.
To explain why, here’s a simplistic stepbystep example of how you might start a new business:
 You start a new company to build widgets.
 You fund the business by moving your life savings into its bank account.
 You use that money to buy the machines which will manufacture the widgets.
 You don’t have anywhere to put the machines so you rent (i.e. lease) a factory.
 You need more machines so you buy them using money borrowed from the bank.
 You buy raw materials which will be used to make widgets.
 You turn on the machines, feed in the raw materials and churn out widgets. Customers begin buying widgets and sending money into your company’s bank account.
 You use that money to pay your employees, suppliers, utility bills and so on.
 If there’s any money from customers left over at the end of the year, then the company made a profit, so it has to pay tax.
 After making a profit and paying taxes then, and only then, can you realistically begin to think about paying yourself a dividend.
As you can see, there are many things which need to happen before dividends can be paid. Companies need to invest in assets such as factories, equipment and stock; they need to sell products or services to customers and they need to pay suppliers, employees and taxes. Dividends, if any are to be paid, come at the very end of that process.
So we have to measure growth across a range of these factors; otherwise we’re only getting half (or less) of the picture.
Before I get into the details, here’s some basic terminology (i.e. jargon) which you’ll need to know if you want to analyse businesses. If you already know these terms feel free to skip ahead.
Definitions
Capital employed: Companies need assets, such as factories, offices, machinery and raw materials to produce products and services for their customers. These assets are funded by a combination of equity capital, debt capital and leased capital, which together make up capital employed.
Equity capital: The amount of funding provided by (and owed to) shareholders. Usually it’s mostly made up of retained earnings (earnings which were not paid out as dividends) and funds raised directly from shareholders (e.g. through a rights issue where shareholders inject additional funds into a company in exchange for new shares).
You can find equity capital on the balance sheet where it’s known as shareholder equity or total equity.
Debt capital: The amount of funding provided by (and owed to) banks or other lenders.
You can find it on the balance sheet where it’s usually called borrowings, bank loans, overdrafts and so on.
Leased capital: The amount of funding provided by (and owed to) leasors and landlords. Unlike banks, which provide funding in the form of cash, leasors fund businesses by allowing them to use assets (such as a retail store) without paying for them up front.
You may find it on the balance sheet where it’s usually called lease liabilities. However, it may be folded into another type of liability (e.g. other liabilities) so you may have to search the annual reports for any mention of “lease liability”, “lease liabilities” or “operating lease”.
Revenues: The amount of money earned by a company over a given period (e.g. six months for the interim results and 12 months for the annual results), before expenses. Also known as sales or turnover, you’ll find revenue at the top of the income statement.
In simple terms then, companies first grow their capital employed by raising additional equity, debt or leased capital to fund new factories, machines, stock and so on. Those assets then generate growing revenues, and hopefully those revenues will allow the company to grow its dividend.
So the first thing I look for is capital employed growth, followed by revenue growth and then dividend growth.
To keep things simple, I combine capital employed growth, revenue growth and dividend growth into a single metric which I somewhat unimaginatively call Growth Rate.
Calculating a company’s Growth Rate
The first thing to note is that growth should be measured over a period of at least a 10 years because measuring growth from one year to the next is a waste of time.
Even the best companies will occasionally shrink in a given year, just as the worst companies can grow in a single year. What matters then is not what happens in a single year, but what happens year after year after year, and perhaps even decade after decade.
My preferred approach to measuring longterm growth is one I borrowed from Benjamin Graham. The approach has two basic steps:

Calculate multiyear averages for capital employed, revenue and dividends to smooth out the ups and downs of individual years

Measure how those averages have changed across a 10year period.
We’ll need capital employed, revenue and dividend data, all on a per share basis for the last 10 years. You should already have the dividend data for your chosen company if you worked through the dividend cover calculations from the previous article.
Here’s a quick reminder of where to find the data in the company’s annual reports (or you could take the easier route and use a data provider such as Morningstar or SharePad):

Capital employed: On the balance sheet. It’s made up of:

Equity capital: Called total equity, shareholder equity or net assets.

Debt capital: Under liabilities, called borrowings, bank loans and overdrafts or similar.

Leased capital: Usually called lease liabilities. If you can’t find it on the balance sheet search for “lease liabilities” or “operating lease” as it may not be listed as a separate item on the balance sheet.


Revenue: At the top of the income statement.

Dividends: Usually mentioned near the start of the annual report and/or underneath the income statement.

Number of shares: Usually mentioned in the accounting notes at the back of the annual report. Search for “weighted average” and you’ll see it mentioned in the calculation for earnings per share.
As an example of how to convert a total figure into a per share figure, here’s the calculation for revenue per share:
Revenue per share = revenue / average number of shares
Per share figures are usually quoted in pence, so you may want to multiply the resulting per share figure by 100 to convert it from pounds into pence (or the foreign currency equivalent).
This is of course much easier if you use a spreadsheet, and if you don’t want to make your own, then you can use the same investment spreadsheet as I do.
Now that we have all the necessary data, the steps for calculating a company’s Growth Rate are as follows (don’t worry if these instructions are a bit dry and academic; we’ll work through an example soon enough):
Steps to calculate Growth Rate
1) Calculate capital employed per share (CEPS) growth:
1.1) Calculate CEPS for each of the last 10 years.
1.2) Calculate the average CEPS for the oldest three years.
1.3) Calculate the average CEPS for the latest three years.
1.4) Calculate CEPS growth:
CEPS growth = (latest avg. CEPS / oldest avg. CEPS ) – 1 × 100%
2) Repeat step 1 for revenue per share (RPS)
3) Repeat step 1 for dividends per share (DPS)
4) Calculate growth as the average of CEPS, RPS and DPS growth:
growth = (CEPS growth + RPS growth + DPS growth) / 3
5) Calculate the annualised growth rate:
Growth Rate = ((100% + growth) ^ 1/ 7) – 100%
In the expression above, “^” is called a caret and it represents an exponential, in other words it means “raise to the power”. In this case we’re raising the total growth figure to the 1/7th power.
There are two reasons why we use the 1/7th power.
The first is that there are seven years between the oldest and latest threeyear averages in a 10year period.
The second is that the 1/7th power is effectively the opposite to the 7th power. If we wanted to calculate total growth over seven years at a given growth rate, we would raise that growth rate to the 7th power (i.e. multiply it by itself seven times). However, in our calculation we’re starting with the total growth rate and calculating the annual growth required to achieve that total growth, so it’s the opposite calculation which is why we use the opposite power (1/7th in this case).
This sounds more complicated than it actually is, and thankfully an investment spreadsheet can do all this in an instant.
I think now is a good time for an example, but first, here are the related rules of thumb:
Growth Rate rules of thumb
Only invest in a company if its Growth Rate was above inflation (approximately 2%).
Be wary of companies where capital employed, revenue or dividend per share growth over 10 years was negative.
Burberry’s Growth Rate
I’ll use Burberry (OTCPK:BURBY) as an example again, having already reviewed it briefly when we looked at the consistency of its dividend cover. The table below contains all the per share data we’ll need to calculate Burberry’s Growth Rate.
YEAR  REVENUE PS (P)  CAPITAL EMPLOYED PS (P)  DIVIDENDS PS (P) 

2010  268.2  287.6  14.0 
2011  338.1  319.1  20.0 
2012  418.0  386.2  25.0 
2013  447.6  404.9  29.0 
2014  520.9  464.7  32.0 
2015  563.5  546.9  35.2 
2016  563.7  554.2  37.0 
2017  625.5  596.3  38.9 
2018  636.4  522.5  41.3 
2019  655.3  586.2  42.5 
Burberry’s capital employed, revenue and dividends to 2019
You can get a general feel for how fast Burberry grew over those 10 years by looking at its 2019 figures compared to those from 2010. All of them have more than doubled in that time, so the company has definitely grown quite quickly.
However, it will be much easier to compare Burberry’s growth to other companies if the mass of figures in that table are first converted into a single Growth Rate using the steps outlined earlier:
Calculating Burberry’s Growth Rate
1) Calculate capital employed per share (CEPS) growth:
1.1) Calculate CEPS for each of the last 10 years:
As an example, here’s the calculation for 2010:
Equity, borrowings, lease liabilities and number of shares for 2010 were £590.1 million, £206.4 million, £474.5 million and 441.9 million respectively, so:
Capital employed = £590.1m + £206.4m + £474.5m = £1,271.0m
CEPS = £1271.0m / 441.9m = £2.876 = 287.6p
1.2) Calculate average CEPS for oldest three years:
CEPS for 2010, 2011 and 2012 was 287.6p, 319.1p and 386.2p respectively, so:
Oldest avg. CEPS = (287.6p + 319.1p + 386.2p) / 3 = 331.0p
1.3) Calculate average CEPS for latest three years:
CEPS for 2017, 2018 and 2019 was 596.3p, 522.5p and 586.2p respectively, so:
Latest avg. CEPS = (596.3p + 522.5p + 586.2p) / 3 = 568.3p
1.4) Calculate CEPS growth:
CEPS growth = (568.3p / 331.0p) – 1 = 0.717 = 71.7%
2) Calculate revenue per share (RPS) growth:
2.1) Calculate RPS for each of the last 10 years:
As an example, here’s the calculation for 2010:
Revenue and number of shares for 2010 were £1,185.1 million and 441.9 million respectively, so:
RPS = £1185.1m / 441.9m = £2.682 = 268.2p
2.2) Calculate the average RPS for the oldest three years:
RPS for 2010, 2011 and 2012 was 268.2p, 338.1p and 418.0p pence respectively, so:
Oldest avg. RPS = (268.2p + 338.1p + 418.0p) / 3 = 341.4p
2.3) Calculate the average RPS for the latest three years:
RPS for 2017, 2018 and 2019 was 625.5p, 636.4p and 655.3p respectively, so:
Latest avg. RPS = (625.5p + 636.4p + 655.3p) / 3 = 639.1p
2.4) Calculate RPS growth:
RPS growth = (639.1p / 341.4p) – 1 = 0.872 = 87.2%
3) Calculate dividend per share (DPS) growth:
3.1) Calculate DPS for the last ten years:
DPS doesn’t need to be calculated as it’s usually quoted in each annual report.
3.2) Calculate the average DPS for oldest three years:
DPS for 2010, 2011 and 2012 was 14.0p, 20.0p and 25.0p respectively, so:
Oldest avg. DPS = (14.0p + 20.0p + 25.0p) / 3 = 19.7p
3.3) Calculate average DPS for latest three years:
DPS for 2017, 2018 and 2019 was 38.9p, 41.3p and 42.5p respectively, so:
Latest avg. DPS = (38.9p + 41.3p + 42.5p) / 3 = 41.0p
3.4) Calculate DPS growth:
DPS growth = (41.0 / 19.7) – 1 = 1.080 = 108.0%
4) Calculate growth as the average of CEPS, RPS and DPS growth:
Growth = (71.7% + 87.2% + 108.0%) / 3 = 89.0%
5) Calculate the annualised growth rate:
Growth Rate = ((100% + 89.0%) ^ 1/7) – 100% = 9.5%
Burberry’s 10year Growth Rate is 9.5% per year. That’s above my 2% rule of thumb, above inflation for the period and comfortably above the average growth rate of FTSE 350 companies.
Just as importantly, Burberry’s growth was broad based with capital employed growing by 72%, driving revenue growth of 87% which in turn allowed the dividend to be increased by 108%.
Looking for sustainable dividend growth
Burberry’s rapid growth is a good start, but rapid growth which is sustainable is even better, so in the next article in this series, I’ll outline how I look for sustainable dividend growth.
For now though, here’s a quick recap of my Growth Rate rules of thumb:
Growth Rate rules of thumb
Only invest in a company if its Growth Rate was above inflation (approximately 2%).
Be wary of companies where capital employed, revenue or dividend per share growth over ten years was negative.
If you’re wondering why I haven’t mentioned earnings or earnings growth, it’s because I don’t measure earnings growth directly. Instead, I look at earnings indirectly by measuring return on capital employed, return on sales and dividend cover. Return on capital employed and return on sales are important profitability metrics, and I’ll cover them in more detail in a future article.
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